Foot Locker’s road map for growth

AndriaCheng

A previous version of this story misstated the company’s net income growth projection. The story has been corrected.

NEW YORK (MarketWatch) — At Foot Locker Inc.’s flagship 34th Street store in New York, in the middle of a wall of running shoes, there was a sign pointing shoppers to 1,200 styles of running footwear available for purchase on the company’s website.

These are some of the initiatives that Foot Locker
FL, +2.79%
Chief Executive Ken Hicks is undertaking to expand the largest U.S. athletic-shoe chain by more than a third to $7.5 billion in sales in five years, from $5.6 billion last year.

Hicks is planning to increase revenue profitably, growing gross margin and sales per square foot at the same time. The company projects that annual net income as a percentage of sales will increase to 7% by 2016, from 5% last year.

Foot Locker targets sales per square foot to grow to $500 in five years, from $406 last year and $333 in 2009. Same-store sales are projected to rise in the middle single digits after rising by 9.8% last year, the highest level in at least three years.

“They continue to execute,” said analyst Christopher Svezia of Susquehanna Financial Group in an interview. “They are doing a lot of things better. The new goals could be achievable. I’ll give them some credit.”

The new goals were laid out as the company reached most of its previous five-year goals set in 2010 ahead of schedule. Analysts have given Hicks, a former J.C. Penney Co.
JCP, +0.00%
executive who joined Foot Locker in 2009, a thumbs-up, praising his initiatives including improving relationships with vendors such as Nike Inc.
NKE, +1.79%
Adidas AG
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(ADS) and Under Armour Inc.
UA, +2.23%

Foot Locker improved results “through organic action and not by going to vendors to ask for money,” Hicks told a group of about 100 analysts and investors at its New York headquarters on Tuesday.

He’s also changed merchandise displays to feature a complete, color-coordinated clothing and shoe ensemble from head to toe, and added more running and other categories to expand beyond its namesake chain’s traditional focus as a basketball-sneaker shop.

To improve customer service, the company has added training to help employees better sell sports shoes and devote more time to working with customers instead of on other tasks.

Foot Locker’s stock has almost tripled since Hicks joined on August 2009, compared with the 40% increase in the S&P 500 Index
SPX, +0.01%
Foot Locker shares rose 0.6% in late afternoon trading Tuesday.

New stores planned

Hicks’s road map includes a net new opening of 60 to 70 stores, including some under the Kids Foot Locker and Champs banners, starting next year. That compares with a net opening of seven expected this year. Last year, it closed more stores than it opened.

Foot Locker has about 3,400 stores in 23 countries in North America, Europe and Australia. It also owns the Footaction chain and sells team gear through Eastbay online and catalog channel.

As part of its growth initiatives, Foot Locker is planning to expand sales in four areas — apparel, women, kids and youth athletic teams. Each of the four segments has the opportunity to generate an additional $100 million in sales, according to Hicks.

Digital sales, which rose 20% to make up 11% of the company’s total in the fourth quarter, is also a focus. Foot Locker will let shoppers pick up in stores what they buy online or on their mobile phones by the first half of this year.

Other opportunities include Europe and concepts such as House of Hoops basketball shops in partnership with Nike. The company has opened new formats such as the Locker Room in the U.K. to sell more performance-oriented products.

Styles and colors only available to Foot Locker, more than 50% of the company’s total products, also will help the company increase demand, along with the company’s private-label products, Hicks said.

With women a key growth opportunity, Foot Locker also is testing concepts to add to the apparel assortment at Lady Foot Locker shops while switching to target an older customer base, from the 15-to-25-year-old demographic to those aged 25 to 35.

Apparel, which is more profitable than selling shoes, is a big opportunity, Hicks said. The category has declined from a peak of 31% of the total in 2003 to 22.8% in 2010 before climbing back to 23.6% last year.

“We got a lot of initiatives and we want to make sure we give them a fair chance,” Hicks said in an interview, noting he prefers to invest the company’s capital back in the business.

He acknowledged that the economy is the company’s “biggest challenge,” because of the high unemployment rate among teenagers.

In Europe, Hicks acknowledged things have slowed down because of the region’s fiscal crisis, but maintained it’s still a profitable market with plenty of growth potential. Greece, where the company has four stores, actually posted rising sales in February, he said. Hicks also forecast demand will improve in the region due to this year’s London Olympics and European Football Championship.

Still, even with the economy, he’s seeing some silver linings. With more kids and young adults living at home instead of having to pay the rent or for a car, what they make is theirs to spend. Meanwhile, an industry fashion trend for athletic styles and lightweight shoes is helping Foot Locker secure a share in consumers’ limited budgets.

“The money they get is spending money,” Hicks told MarketWatch. “That’s why we’ve not been impacted as much. The kids aren’t going out to buy a car or a $1,000 handbag. They are spending money on sneakers and not on other things. We are the place to go to differentiate themselves.”

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